REG- Commercial Paper

Question 2

REG

What is a promissory note?

Answer 2

A promise to pay a specific amount

Two parties involved - maker and a payee

Can reference other transactions without harming the instrument’s negotiability

Example: Bank Certificate of Deposit (CD)

Question 3

REG

What is a draft?

Answer 3

A commercial paper involving three parties- a drawer, a payee and a drawee

A drawer orders a sum to be paid to a payee by the drawee

May be payable on demand or in the future

Question 4

REG

What is a check?

Answer 4

A check is a type of draft that is payable ON DEMAND, payable to order of drawer or bearer

Drawer - person writing the check

Payee - person being paid

Drawee - the bank

Question 5

REG

What is the difference between a post-dated check and a negotiable time draft?

Answer 5

A check is payable on demand, even if post-dated.

A negotiable time draft is not payable until the date designated for payment.

Question 6

REG

What is a trade acceptance?

Answer 6

Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability

Question 7

REG

What is the purpose of the negotiation of commercial paper?

Answer 7

Transfers ownership to another party

Question 8

REG

What is required to maintain the negotiability of a commercial paper?

Answer 8

Must be in writing

Signed by drawer/maker

Be without conditions for payment (other than limitations on payment sources)

Amount of money must be stated

Payable to order or bearer

Question 9

REG

What characteristics will cancel the negotiability of a commercial paper?

Answer 9

An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event, it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK

Question 10

REG

What is required to negotiate Order Paper?

Answer 10

Must have delivery and endorsement

If paper is exchanged for value, transferor must give an UNQUALIFIED endorsement

Question 11

REG

What are the major types of endorsements on commercial paper?

Answer 11

Blank - Doesn’t name a new payee, transforms into a ‘bearer paper’

Special - Names a new payee, transforms into an ‘order paper’

Restrictive - Adds restrictions, doesn’t stop further negotiation

Qualified - Payment not guaranteed, ‘without recourse’ added to endorsement

Question 12

REG

If endorsed, within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 12

Within 7 days

Question 13

REG

On a commercial paper, which value will supercede - words or numerical dollar amount?

Answer 13

Written amount supercedes the numerical dollar amount.

For example, if the words say ‘One hundred dollars’ and the numerical amount states $1000.00, the value of the paper will be $100.00.

Question 14

REG

Define primary liability with respect to a contract.

Answer 14

First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check, no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify – i.e. promise to
pay

Question 15

REG

Define secondary liability with respect to contract liability

Answer 15

Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed ‘Without Recourse’

Question 16

REG

Define contract liability.

Answer 16

Guarantees payment of a liability

Question 17

REG

When does warranty liability occur?

Answer 17

Occurs when you negotiate commercial paper

By signing, you warrant to all future parties

By not signing, you warrant to current party only

Question 18

REG

What five warranties occur with every commercial paper transfer?

Answer 18

Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate

Question 19

REG

What are the requirements for a holder to be a holder in due course?

Answer 19

Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you don’t know that it’s stolen, you’re still an HDC

Having no knowledge of defenses again instrument, i.e. problems with the instrument

Giving a present value for the instrument (a future value doesn’t count)

Question 20

REG

What are the personal defenses against a holder in due course (HDC) which will LOSE?

Answer 20

An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts

Question 21

REG

What are the REAL defenses against a holder in due course (HDC), which will WIN?

Answer 21

A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)

Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution